Executive pay at Woodside, Santos targeted

Influential proxy advisers ISS and CGI Glass Lewis have voiced concerns about CEO pay at both Woodside Petroleum and Santos ahead of annual shareholder meetings next week, taking issue in particular with incentive payouts for Santos boss Kevin Gallagher and the short-term nature of some targets for Woodside's Peter Coleman.

While both advise investors support all resolutions to go before shareholders at the May 2 meetings, ISS offered only qualified backing for Woodside's remuneration report, criticising the non-disclosure of some targets underpinning the oil and gas producer's new executive incentive scheme.

The meeting will be the first under chairman Richard Goyder, who took over last year from Michael Chaney, who presided over a "first strike" against the board on pay in 2016.

Neither Woodside's nor Santos's board is now on a "first strike"; last year 5.14 per cent of Woodside shareholders opposed the remuneration report and 1.87 per cent of Santos's.

Australia's two biggest oil and gas producers are under scrutiny over CEO remuneration. Bloomberg

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"Closer scrutiny of the FY19 remuneration report may cause some shareholders to vote against."

— ISS

ISS pointed to limited transparency on some targets to demonstrate how Woodside's incentive payout scheme "represents anything other than a bonus for the 'day job'."

The adviser reiterated several concerns over aspects of remuneration it noted had also been raised in prior years, saying shareholders at the Perth-based oil and gas producer "may reasonably expect their concerns to be addressed by the board".

"Closer scrutiny of the FY19 remuneration report may cause some shareholders to vote against," it cautioned.

ISS put total pay for Mr Coleman last year at $5.45 million, excluding long-term performance rights – higher than the $3.33 million median of company peers. Including the rights, the figure rose to $6.92 million, compared with the median of $6.15 million. ISS put Mr Gallagher's total pay at $5.57 million, higher than the median of peers of $4.85 million.

CGI Glass Lewis also took issue with aspects of Woodside's new incentive scheme, which combines short-term and long-term incentive plans. It said the one-year performance used to allocate awards was "too short-term-oriented for executives, who should ideally be rewarded for long-term sustainability of results".

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The adviser noted some shareholders may vote against the remuneration report partly because of "scepticism" about the combined incentives, and disclosure around the scorecard used. It said while it was "willing to support the remuneration report at this time" it may reconsider that support in future if its concerns were not addressed.

A Woodside spokesman said the design of the scheme took into account shareholders' feedback since 2016 and aligned with their interests. He said extended vesting periods of three and five years complemented the corporate strategy and were "some of the longest" in Australia.

For Santos, ISS criticised "less than rigorous" targets for free cash flow breakeven for the granting of share purchase rights to Mr Gallagher.

CGI also took issue with "insufficiently challenging" hurdles on that metric for Santos's employee equity incentive plan. The hurdle has a threshold of $US40 a barrel of oil equivalent at which 50 per cent vests, rising to 100 per cent at $US35 a boe. But breakeven was already $US31.30 last year, it noted.